European politics

François Hollande

Battling French decline

HE HAS lost popularity faster than any French president in modern history, and been roundly criticised for a lack of leadership. Yet it was a remarkably serene François Hollande who defended his first six months in office at a press conference in Paris on November 13th. Betraying no sign of panic or pressure, the Socialist president declared that “decline is not our destiny” and asked to be judged not on “the state of public opinion today, but the state of France in five years' time”.

Mr Hollande gives plenty of press conferences when travelling abroad, but this was the first he has held in Paris in the quasi-monarchical tradition of Fifth Republic presidents, starting with Charles de Gaulle. Standing in the salle des fêtes, the grand reception room of the Elysée palace, with rows of government ministers seated to the side like royal courtiers, Mr Hollande chose a setting that broke with his declared aim of being an unstuffy “normal” president in touch with the people. He promised to repeat the exercise every six months.

The main difficulty Mr Hollande faced was to explain to the French why he has begun to do things that, during his election campaign, he either vowed not to, such as increasing the rate of VAT, or that he scarcely mentioned, such as cutting public spending. Having devoted most of his first four months to policies that appealed to his left-wing base, such as a (small) rise in the minimum wage or a new top tax rate of 75%, Mr Hollande has now begun belatedly to face far tougher decisions over public spending and competitiveness.

He has promised to bring down the budget deficit to 3% next year, and has already announced €20 billion ($25 billion) of tax increases and €10 billion of budget savings in order to do so. Yet these calculations are based on growth estimates for 2013 of 0.8%, which few outside economists consider realistic. The French economy, according to the Bank of France, is expected to contract in the fourth quarter of this year, and probably did so in the previous three months, following three flat quarters. So further budget cuts are all but inevitable next year.

In his first real attempt to prepare the French for this shock, he recalled that public spending stands at a hefty 57% of GDP and declared that “we must be ready to do better by spending less”. This, Mr Hollande explained, would mean “reforming the state and social welfare”. Although he declined to go into any detail, nor to explain how enacting this would be in keeping with his campaign promise to bring an end to austerity, this was a wholly new message that he will have to come back to in the coming months if he is serious about it.

On competitiveness too, Mr Hollande owed the French an explanation. In his 2013 budget, unveiled in September, he slapped an extra €10 billion of taxes on companies, enraging businesspeople and creating the impression that France was hostile to wealth creation. Last week, however, his government announced to widespread surprise that it would give companies €20 billion of tax breaks to compensate for the heavy burden of payroll charges, following the publication of a report by Louis Gallois, a respected left-leaning industrialist, which stressed the problem of high French labour costs. To pay for these, Mr Hollande plans unspecified spending cuts and green taxes as well as an increase in VAT, precisely the policy he had campaigned against.

“It’s true, I contested [a VAT increase],” Mr Hollande conceded at his news conference, but argued that at least he “didn’t wait five years to take a decision”. In a contorted effort to mask a U-turn with wordplay, he argued that he was in fact “restructuring” VAT, to make it fairer, since he was also lowering the rate applied to essential goods. Mr Hollande also called for a “historic compromise” before the end of the year on the labour market, the subject of ongoing negotiations with the unions, in order to bring about more “suppleness”.

Although the president’s performance was generally applauded by his supporters—Libération newspaper spoke of an “audacious mutation of the French left”—Mr Hollande now faces a double challenge. He needs first to decide how far he is prepared to go in adopting a more business-friendly approach and dealing with public spending and competitiveness. So far, for instance, despite the talk, he has not identified a single item of budget savings, nor specified where social services might have to be cut back. Second, if he is indeed serious, he will need unusual political skill to explain to the left of his party, as well as his electorate, why the man they backed to tax big business and end austerity is now bringing in a massive corporate tax rebate and warning that the French state will need to learn to spend less.

France's workers are supposed to be present at work for 35 hours a week.
During this time they are very busy with union meetings, workers counsel meetings, safety committee meetings, mandated by law meetings with management, meetings to discuss the colour of the toilet paper and other highly productive activities.In return for this value adding, they go on strike, demand ever higher minimum wages, demand more FTEs even if there is less work, want less hours in the week, 6 weeks holidays per year, want to go on retirement preferably immediately after graduation, total job security and continued immunity for holding managers hostage in their office when demands are not met (civilized countries punish this with jail time).

President Hollande's chances for successful reform are less then the chances of survival of a snowball in hell.

I am sick to death of being told that as a Frenchman I am lazy compared with the "hard working" northerners. I have lived for more than 10 years of my life in the U.K. working in the industry and most people I have met over there get to work at 9.00 AM to leave at 5.30 PM sharp. I am back in France now and I regularly see "ClubMed" civil servants arriving at the same time in the morning but leaving easily after 6.00 PM in the evening. And yes, the retirement age for me and a lot of other people who have gone to university is 67 (just in case TE forgets to report).

Adding to that the fact we are constantly being given lessons about our public finances by the British press (TE being the first one) about our deficit, despite the fact that it much lower than the U.K.

Enough is enough ! I am definitely not in awe of Hollande and I positively love Britain but some people over there should start swiping their own doormat instead repeatedly attacking others under the cover of pseudo-objectivity.

So socialist Hollande and his gang ran already out of other people's money. Was to be expected. It will be interesting to watch when the inevitable massive restructurings in France will take place, and what exactly will be done.
Anyway, the French are a ClubMed nation and by mentality much closer to Greece, Spain, Italy and Cyprus than they are to the core and northern nations. It would make a lot of sense to divide the Eurozone in two regions. One made of the southern countries, one of the rest.

"Ideally, spending reductions should be counter-cyclic. What happened to this pearl of wisdom?"

This 'wisdom' was squandered away when the 'big spenders' left it, together with their brains, in the broom closet of economic theories during the boom years.

Keynes believed that on average, the government budget should be balanced. This meant that during years of prosperity, the governments should run budget surpluses.

Thus, Memphis Bob, 'counter-cyclic' requires first of all to save money during the good times so that it could be spent during bad times. But this 'pearl of wisdom' didn't happen.

The politicians, over the decades, just took one part of Keynes’s advice, they forgot that Keynes had also wanted them to be running surpluses during good times.

In order to be (re)elected, politicians began "to sell the skins before the bears were caught". The belief in running deficits all the time, deficits in good times and bigger deficits in bad times, became permanently etched in the minds of almost all politicians in Western democracies. This meant more and more borrowing. Campaign goodies for the clientele of political parties and election promises for everyone plundered the treasuries and squandered away the future of whole nations.

And that’s how the Western democracies ended up with all the debt, which has brought current fiscal and economic disaster over the whole world.

It's a difficult choice for Hollande - staying in touch with his voters or with reality.

Most French citizens still haven't realized the the 'Trente Glorieuses' (the 3 glorious decades of economic expansion that followed WWII) are long gone now, never to return.
They don't realize that in order to survive, they'd have to work more hours, harder, earn less, save less, spend less, forget about job security, and get less free and subsidized services from the omnipresent French government.
Through the years, French governments succeeded in masking reality with increasing interventionism, social programs, and debt, but these anti-aging cremes don't work anymore, and reality is apparent.

Hollande needs to shrink the French government's economic footprint
and influence, but unfortunately, it doesn't look like he could do it.

You forgot to mention that they all wear a béret and a baguette under their arm when they go to work. And by the way, given all the indisputable facts you mention, one can only be shocked that France is 7th in terms of labor productivity (total and per-hour): http://www.jpc-net.jp/eng/research/2012_02.html

As far as I know from US media reports, Mr Fuchtel was in Greece to look into the country's bloated public service. Surely he couldn't have done so without the request or agreement of the Greek government.

To use violence against an official envoy when he presents findings which are not liked by some is barbaric. I do not believe that the EU has a place for such behaviour. However, if this is the case, then those who share such barbaric attitudes should form their own club.

Also, in the wake of this crisis, it becomes more and more apparent that parts of the French society are much closer to this kind of "Greek mentality" than to the civilized countries of Europe's North. This is why your position is fully understood here.

Now, News here in the US are full about massive violent Greek protests over comments by German envoy Hans-Joachim Fuchtel about the general inefficiency of Greece's public administrations.

However, as I understand it, to look into it and make suggestions for improvements was 'the job' of this 'special envoy', Deputy Labor Minister and former Parliamentary Undersecretary in the German Federal Ministry for Labor and Social Affairs.

According to the New York Times, the incident flared a day after Fuchtel remarked that studies showed that 1,000 local government officials in Germany do the work of 3,000 officials in Greece. Asked about his opinion, he had told journalists on Wednesday that Greece could do more to reform its bloated local government sector.

If such - most likely appropriate - statement creates violence of such dimensions, then I really believe Greece should join the league of countries where furious violent crowds regularly burn Western flags and attack Western embassy personnel over (Islam-) critical publications.

I don't believe that such mentality has a place among the enlightened nations of 21st century Europe.

"...in the effort of putting Germany and his pretenses in the corner."

Nothing new on the Italian home front... Blame it on the Germans and their attempt to build a 4th Reich.

And of course no "irresponsibility of some government" in Italy.

"France must back Italy and Spain" If France would gain anything by teaming up with the Southern weaklings. Despite all efforts to show off (aka rebel against Merkel), Hollande knows exactly who is footing the bill in Europe....

You do not redistribute wealth. You can redistribute income through income tax or social security charges. You can also redistribute consumption through VAT.

All it means is that you create wealth to more individuals or more slowly. It is only the already wealthy who try to escape a more equitable distribution by desperately trying move their wealth to escape the taxes due.

All this is no surprise to socialists and even the Australian government has grasped it. You, however seem to have missed it.

No political leader aspiring to do the things that need doing can give more than sigh to popular ratings.
No matter how important to remain in touch with the populace, government is about running day-to-day business with a clear view to the future. To that end any responsible French President backed by responsible advisors could no longer ignore the real issues explaining France's underperformance and the new challenges posed by the global economy.

France has a long tradition of enlightment, culture, human rights, values, innovation, savoir-faire and state-of-the-art technology.
However, it cannot go unnoticed that the country has slipped in industrial competitiveness vis-a-vis next door Germany. A relative decline it has been for which adequate measures must be enacted now that will arrest and reverse the slide.

Home to such world-famous names as Mirage jets, Exocet missiles, Areva nuclear reactors, Airbus commercial aircraft, Carrefour retail chain, TGV/high speed trains (itself a brand-name), Renault-Peugeot-Citroen cars, Total oil, perfumes, champagne, etc, France must ensure it retains all of these by providing a business-friendly environment for them to prosper and invest in.
To my mind this will be Mr. Hollande's most critical test.
His administration has already given due relevance to Louis Gallois' report. It has started out in great style acknowledging the need of the hour as pin-pointed by one of the country's greatest managers.

Changes to VAT rates seem to me generally well-balanced between a desired increase in overall revenue and a cut to the reduced rate on essentials.

Many governments across the developed world face similar problems to varying extents. Most are underpinned by excessive State spending over many years now demanding adjustment in line with tax revenue.

Turning France's fortunes around will require time, reform and boldness.
The first steps in the right direction appear to have been taken.
More will follow but balance must remain the keyword.
The stakes are high enough for France, the Eurozone and the wider EU.

Not only that. Walterbenjamin wrote: “To help you I take one example: Germany. 67% of its exportations are inside EU. It means that the main part of its "surplus" in Europe - and most of them inside the Eurozone”.

It also seems that commenter walterbenjamin has problems to understand how 'free trade' in the Western world functions: The sale and the price of goods are determined by 'supply and demand' - on all levels, domestically, nationally and internationally. No law of free trade requires that the “seller” must compensate the “buyer” for his purchases. A surplus in sales-value results in the accumulation of ‘wealth’. This is, among other, how the capitalist system is defined and it applies to individuals as well as to whole countries. Of course, if one is a resident of a former communist country, as this commenter seems to be, then he is familiar with centrally planned economies, not with free trade. He obviously didn't realize that the European Community isn’t yet a centrally planned communist economy, even though some are working on it, LOL.

And you are right: The EU is losing steadily in importance for German exporters. According to the Federal Statistical Office, still five years ago (in 2007, before the crisis) Germany exported 64.6 percent of total exports to countries within the EU (not 67 percent as walterbenjamin claimed). In 2011, only 59.2 percent of all German exports ended up in the European Union. http://www.spiegel.de/wirtschaft/soziales/deutsche-exporte-nach-europa-s...

I see this quite often here on these blogs that some are trying to isolate exports from imports. However, highly developed countries which are densely populated but lacking the necessary commodities to run their sophisticated production processes, will automatically have a high volume of international trade, in both directions, exports AND imports.

Germany is the largest national economy in Europe, the fourth-largest by nominal GDP in the world. Since the age of industrialization, the country has been a driver, innovator, and beneficiary of an ever more globalized economy. In 2011 Germany was the world's third largest exporter with an export volume of $1.398 trillion. At the same time, Germany was also the world’s third largest importer with an import volume of $1.219 trillion.

As with the rest of the world, Germany’s exports to countries of the eurozone interrelate with the imports from there. In 1998 (BEFORE the introduction of the common currency) the exports to present-day eurozone countries still accounted for 45 percent of all German exports. End of 2011 that share had declined to only 38.1 percent. Also the imports from eurozone countries have fallen (to 37.7 % by end of 2011), but only because the imports from the rest of the world increased even more.

These figures document that, while Germany doesn’t necessarily rely on the eurozone countries for its economic well-being, some of the eurozone countries – especially from the periphery - could hardly survive on the current GDP level without their exports to Germany.

Especially since imports from the eurozone periphery were 14 % higher towards the end of the year 2011 compared to the beginning of the recession at the end of the year 2007. This trend is continuing as you correctly noticed (be under 34% in 2020). The eurozone remains very important to Germany’s overall trade, but it is hardly the “motor of its growth”.

These facts, e.g., that Germany's export share with today's euro countries was bigger BEFORE the launch of the common currency, render all arguments invalid which claim that the Euro ‘boosted’ German exports benefited Germany most.

Currently, via the towering TARGET2 accounts, the country's Bundesbank is rather financing the eurozone countries' continuous consumption, not only of German goods but also their consumption of forex goods from oil-producing countries and from China.

walterbenjamin: “I advice you to look the different transfers between States in USA to understand what means European Union's problem”.

And I “advise” you to learn your facts before commenting on issues you obviously don’t understand.

Fact is that transfers between states are unconstitutional in the USA. Direct federal spending on state affairs is rather limited and takes place via contributions to federal sponsored projects within the states.

Federal taxes collected in states may or may not be returned as federal spending. There is no direct fiscal equalization scheme through the Federal Treasury.

However, some states benefit more from federal taxing and spending policies than others. Some "beneficiary" states receive a positive return from Uncle Sam, making other states indirectly "donors", who pick up the tab.

The most important factor determining whether a state is a net beneficiary is the income of individuals. States with many wealthy residents pay higher federal taxes per capita thanks to the progressive structure of the US income tax. Other factors include whether states have powerful Members of Congress who are able to concentrate federal infrastructure (military, federal offices, NASA etc.) in the states they represent, which in return will boost the number of federal employees present in a state.

The biggest federal “equalization factor” is determined by the number of residents receiving Social Security, Medicare and other federal entitlements in a given state. However, this is not “redistributing federal taxes” but the result of personally acquired entitlements via one’s working-lifelong Social Security and Medicare contributions.

Some ‘sunny’ states, i.e. Florida, are in this respect luckier than states with big cities on the northern east coast. Many retiring Americans also tend to settle down in cheaper rural states, thus spending their federal retirement benefits often in states less wealthy than those states they spent their working lives.

Translated into the problems southern European countries are having, this would mean for them to become much more attractive to retirees from the wealthy north of Europe. Of course, nobody in Florida or Mississippi would picture the residents of New York or Massachusetts as their enemies – rather the opposite. With posters in the nationalist European South picturing Northerners as Nazis, such goal is, of course, not achievable.